September 21, 2021

Salem District Co Operative Milk Producers Union Limited: [ICRA]BB(Stable) assigned

Summary of rating action
Instrument* Current Rated Amount Rating Action
Long-term/Fund-based – Cash credit 60.00 [ICRA]BB(Stable); assigned
Total 60.00
*Instrument details are provided in Annexure-1

Rationale
The assigned rating factors in the strategic importance of Salem District Co Operative Milk Producers Union Limited (SDCMPUL
/ union) in the co-operative value chain of Tamil Nadu dairy industry. The rating draws comfort from the operational support
from Tamil Nadu Co-operative Milk Producers Federation Limited (TCMPF) in the form of assured offtake, need-based
advances and policy directions. The rating also draws comfort from the union’s established procurement network of dairy
farmers, which ensures regular supply of milk. The rating factors in its long track record and established brand name of ‘Aavin’
in Tamil Nadu, which has presence across a range of milk and milk products, and favourable demand prospects of milk and
milk products in India.

The rating, however, is constrained by the moderate financial profile of SDCMPUL, which is characterised by its weak net worth
position due to sustained losses incurred in the past few years and stretched coverage indicators. The rating also considers the
risks inherent to the society nature of the union’s constitution (like inadequate disclosures), commoditised nature of
operations and intense competition from organised co-operatives, private and unorganised players and its unions following
fixed-pricing model unlike private dairies. Moreover, milk production remains vulnerable to external factors such as weather
conditions, cattle diseases and Government-imposed regulations.

The Stable outlook on [ICRA]BB reflects ICRA’s belief that SDCMPUL will continue to benefit from the strategic importance in
the Tamil Nadu dairy value chain, a diverse product portfolio and healthy demand for its products in the domestic market.

Key rating drivers and their description

Credit strengths

Established market position given its importance in co-operative value chain of TCMPF and robust procurement setup –
Dairy co-operatives in Tamil Nadu function under a 3-tier structure. Primary Milk Producers’ Co-operative Society (MPCS)
procures milk from the milk producing members at the village level and supplies to district unions. The milk producers form
the backbone of the dairy industry as they ensure adequate raw milk supply and are paid remunerative prices based on the
quality of milk procured from the farmers. District Cooperative Milk Producers’ Union (DCMPU) procures milk from MPCS, then
processes and markets it to the consumers. Milk procured from MPCS is transported to the nearest bulk milk cooler or chilling
centre for further processing. The unions, after meeting their local demand, send milk to the TCMPF dairies for processing and
sale in Chennai while the surplus milk is used for conversion to margin accretive products like butter, skimmed milk powder
etc. SDCMPUL is one of the major unions among the 25 district co-operative milk producers' unions. The union has an aggregate
milk processing capacity of 5.0 lakh litres per day.

Support from TCMPF – Under the ‘Cooperative union’ pattern through which the domestic dairy cooperatives largely operate,
the village cooperative societies are assured of sales to their respective district unions, and similarly the state-level apex
federation assures purchase of milk from the district-level unions. Thus, SDCMPUL benefits from being a part of this
cooperative structure with assured offtake from TCMPF, reducing its marketing risk. This enables the management to focus on
milk procurement and streamlining operations. Inherent to its business model, the union’s scope for expansion in margins is

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 restricted as milk procurement and selling prices are largely fixed. However, the unions derive support from TCMPF for any
need-based advances, apart from support towards operation and policy-related guidelines. Besides, it receives subsidies and
grants from the Government of Tamil Nadu and institutions such as National Dairy Development Board for any capital
expenditure requirements.

Favourable demand prospects – The demand outlook for the domestic dairy industry is favourable on the back of growing
population, rising disposable income, and rising health consciousness. Favourable demand augers well for both private sector
and cooperatives. The supply related challenges are minimal as well with the country being world’s largest milk producer.

Credit challenges
Average financial risk profile – The union’s financial risk profile is characterised by weak net worth position amid sustained
losses in the past as milk procurement and selling prices are largely fixed. Moreover, given the commoditised nature of
operations and intense competition from organised cooperatives, private players and unorganised players, the margins remain
low for the unions. This apart, its losses widened after demerger of its operation to another union in FY2020, which further
impacted its earnings.

Vulnerability of earnings to Government regulations and environmental conditions – SDCMPUL’s revenue and earnings are
susceptible to Government regulations such as cap on selling prices, higher procurement prices, restrictions on SMP exports,
exogenous factors such as the Covid-19 pandemic, which resulted in closure of restaurants, hotels etc. Moreover, the union is
susceptible to agro-climatic factors such as drought, cattle diseases etc which may adversely impact milk production. Further,
the union’s margins are susceptible to changes in climatic conditions, with the excess supply of milk during the flush seasons
resulting in a decline in the SMP prices.

Limited disclosures inherent to society nature of constitution – As inherent to the society nature of constitution of the unions,
associated risks like limited disclosures are prevalent.

Liquidity position: Stretched

The union’s liquidity position is stretched with near full utilisation of the working capital limits, limited free cash and bank
balances and negative retained cash flows due to continuous losses. However, the union does not have any major capex plans
or any significant debt repayment obligations in the near term.

Rating sensitivities
Positive factors – ICRA could upgrade the ratings if the union demonstrates a healthy improvement in revenues, earnings and
liquidity profile.

Negative factors – Pressure on the rating could emerge with material weakening in the credit profile due to a sizeable
contraction in revenues and earnings or any large debt-funded capex. Absence of adequate, timely support from TCMPF,
leading to a stretched liquidity could, also be a trigger for a rating downgrade.

Analytical approach
Analytical Approach Comments
Applicable Rating Methodologies Corporate Credit Rating Methodology
Parent/Group Support Not Applicable
For arriving at the ratings, ICRA has considered the standalone financials of the
Consolidation/Standalone
rated entity

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 About the company
Salem District Cooperative Milk Producers Union Ltd., established as a cooperative society in 1983, is involved in processing
and producing milk and its byproducts. The union sells milk, curd, milk powder, ghee, butter, ice cream, sweets among others
under the brand name of Aavin, predominantly in Tamil Nadu. It has a milk processing capacity of 5 lakhs litres per day, butter
production capacity of 12 MT/day, ghee production capacity of 6 MT/day, and skimmed milk powder processing capacity of 8
MT/day. The registered office is in Salem district, Tamil Nadu. The Namakkal union was separated from Salem union in FY2020.

The Department of Dairy Development in Tamil Nadu was set up in 1958. The Tamil Nadu Dairy Development Corporation
Limited was formed in July 1972 to manage milk procurement, processing and marketing of milk and milk products. Tamil Nadu
Co-operative Milk Producers’ Federation (TCMPF) was formed in February 1981 as an apex body of three-tier cooperatives set
up in Tamil Nadu and the district level milk producer unions were formed in 1982. The commercial activities of Tamil Nadu
Dairy Development Corporation Ltd., were transferred to the newly registered TCMPF, popularly known as Aavin.

Key financial indicators

FY2019 FY2020 FY2021*
Operating Income (Rs. crore) 767.1 668.8 684.2
PAT (Rs. crore) -7.0 -27.6 23.6
OPBDIT/OI (%) -0.5% -3.8% 4.4%
PAT/OI (%) -0.9% -4.1% 3.4%
Total Outside Liabilities/Tangible Net Worth (times) 1.9 2.7 1.1
Total Debt/OPBDIT (times) -7.4 -0.4 2.3
Interest Coverage (times) -1.7 -18.1 7.3
PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, Taxes and Amortisation; Estimates for FY2021*
Source: Union data, ICRA research

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Chronology of Rating History for the
Current Rating (FY2022)
past 3 years
Instrument
Amount Amount Outstanding Date & Rating in FY2021 FY2020 FY2019
Type
Rated as of Mar 31, 2021 Sep 21, 2021 - - -
1 Cash credit Long-term 60.00 - [ICRA]BB (Stable) - - -
Amount in Rs. crore

Complexity level of the rated instruments

Instrument Complexity Indicator
Long-term / Fund based – Cash credit Simple
The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analyzing an entity's financial, business, industry risks or
complexity related to the structural, transactional, or legal aspects. Details on the complexity levels of the instruments, is
available on ICRA’s website: www.icra.in

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 Annexure-1: Instrument details
Date of Coupon Amount Rated
ISIN No Instrument Name Maturity Current Rating and Outlook
Issuance Rate (Rs. Crore)
NA Cash credit NA NA NA 60.00 [ICRA]BB(Stable)
Source: SDCMPUL

Annexure-2: List of entities considered for consolidated analysis: NA

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 ANALYST CONTACTS
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nithya.debbadi@icraindia.com akshay.dangi@icraindia.com

RELATIONSHIP CONTACT
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